Nexus policies based on a threshold of activity within a jurisdiction are gaining acceptance across several jurisdictions, including California, New York and Ohio. But there has yet to be a definitive ruling on whether the provisions satisfy commerce clause requirements.
The state that has come closest to providing a ruling on this is Ohio, which has had the question presented to its Board of Tax Appeals several times. But the board lacks the authority to address the constitutional question.
In two recent decisions, the Ohio Board of Tax Appeals upheld the imposition of Ohio's Commercial Activity Tax on two out-of-state retailers, Newegg, Inc. and Crutchfield, Inc., based on the state's bright-line presence standards, even though neither company had a physical presence in Ohio. Newegg, Inc. v. Testa, No. 2012-234 (Ohio Bd. Tax App. Feb. 26, 2015); Crutchfield, Inc. v. Testa, Nos. 2012-926, 2012-3068, 2013-2021 (Ohio Bd. Tax App. Feb. 26, 2015).
Newegg and Crutchfield, both online retailers, satisfied the bright-line presence standard because each had gross receipts in Ohio greater than $500,000 in each of the tax years in question. These decisions were consistent with the board's previous ruling in L.L. Bean, Inc. v. Levin, No. 2010-2853 (Ohio Bd. Tax App. March 6, 2014), reported by Lauren Colandreo in the March 20, 2014 Weekly State Tax Report.
In all three cases, the taxpayers argued that the tax commissioner's CAT assessments based on factor presence nexus were in violation of the commerce clause and that the companies lacked substantial nexus with Ohio under the U.S. Constitution. The Ohio board took note of their arguments, but reminded the taxpayers that it had no authority to decide constitutional issues. Limited to applying the plain language of Ohio's bright-line presence statute, the board concluded that each taxpayer had substantial nexus with Ohio because their gross receipts exceeded the statutory threshold.
L.L. Bean filed an appeal to the Ohio Supreme Court, but subsequently settled. As more states adopt factor presence standards, it is probably only a matter of time before a court will have to decide whether these thresholds satisfy the substantial nexus requirement of the commerce clause established in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).
As a result of tax reform legislation last year, New York became the latest state to establish an economic nexus standard to impose franchise tax on out-of-state corporations with no physical presence in New York. This year's budget legislation tweaked the economic presence standard to clarify its application to a combined business group.
Effective for tax years beginning on or after Jan. 1, 2015, New York imposes its franchise tax on corporations that derive receipts totaling $1 million or more from activities in the state during a taxable year. New York's $1 million nexus threshold is higher than ones adopted in other states and the Multistate Tax Commission's model statute. In California, for example, factor presence nexus became effective for tax years beginning on or after January 1, 2011, and gross receipts of $500,000 or more (adjusted for inflation beginning in 2014).
In New York, a combined group of corporations will exceed the nexus threshold if group members with at least $10,000 in New York sourced receipts have more than $1 million in receipts in the aggregate. The 2015 budget legislation clarifies that receipts of group members are aggregated only if, in addition to meeting the $10,000 individual threshold, the members are engaged in a unitary business and satisfy the ownership test of N.Y. Tax Law § 210-C (i.e., more than 50 percent of voting control).
You can find more about states pushing for economic nexus standards in the story by Chris Bailey, et al., in the January 23 Daily Tax Report. How should economic presence be determined? Should there be a requirement that a business take affirmative action to develop a market in a state, or is merely making sales into the state sufficient to establish nexus?
Bloomberg BNA will continue to monitor legislative developments in the states and any further developments in the Newegg and Crutchfield cases.
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